GM. This is Milk Road Macro, the only newsletter where “cash flow” means a tidal wave, not a trickle. Wall Street’s about to get soaked with $100B in systematic buys.
Here’s what we got for you today:
- ✍️ Relentless $100B+ bid for stocks is ahead
- 📊 Trump wants the Fed to cut rates. What do you think?
- 🍪 Treasury Secretary slammed the Fed for delaying rate cuts
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Prices as of 8:00 AM ET.
RELENTLESS $100B+ BID FOR STOCKS IS AHEAD
An avalanche of cash flows is likely heading for the US stock market over the next month.
And this is due to predictable and systematic flows. (I previously wrote about how systematic flows are an important aspect of markets here)
Risk asset prices dropped in late May as a large “rebalancing” occurred.
Now, we likely have more systematic flows ahead of us - but this time it’ll be buying pressure.
And this time, it will be volatility control funds at the wheel.
They are predicted to buy more than $100 billion in US equities over the coming weeks, according to Charlie McElligott of Nomura.
A record amount.
Historical precedent indicates this kind of large systematic bid is likely to propel stocks higher.
It might also create a wider “risk-on” environment which may spill-over to other risk assets like bitcoin and other cryptocurrencies.
So, what in the world are “volatility control funds”?
How do we know they are going to be buying stocks?
And what can we expect?
Let’s take a look…
What are "volatility control funds”?
In simple terms, a volatility control fund tracks how much “market volatility" (or price movement) is happening.
A high volatility means big swings in price, and a low volatility means smaller swings.
The fund then uses this information to decide when to buy or sell stocks.
These volatility control funds dynamically adjust exposure to risk assets to maintain a target level of portfolio volatility.
When volatility exceeds the target, the fund will reduce exposure to risk assets.
On the other hand, when volatility falls below target, the fund increases exposure to risk assets.
Volatility control funds manage more than $350bn in assets, so big buying from these funds can significantly impact market liquidity and exacerbate market trends.
They will often buy stocks in low-volatility bull markets, propelling them further.
And will often sell stocks in high-volatility bear markets, adding to selling pressure.
How do we know they are going to buy?
Volatility control funds will often systematically buy stocks in situations where realized volatility is falling.
And this is often heavily tied to three month realized volatility - the volatility over the most recent three month period.
Three-month realized volatility has been high recently, but is currently starting to fall and is likely to collapse significantly over the coming days and weeks.
Why is this?
Because the three-month “volatility window” currently still includes the month of April, which saw historically extreme price movements in stocks due to the tariff chaos at the time.
But volatility has dropped considerably since then.
And as we move through the month of July, this incredibly volatile April period will “fall out” of the rolling “three month window”, likely causing three-month realized volatility to drop significantly.
This will cause volatility control funds to buy stocks - and buy a lot of them.
These predicted flows will be systematic.
As long as we don’t see another crazy period of volatility like we saw in April imminently, the flows will come.
Just a relentless bid for stocks under pretty much any circumstance.
So what’s the Nomura model saying?
Last week, Nomura’s volatility control model projected $114B in equity buying over the next month - the biggest one month volatility control flows it has ever predicted.
The flows have already started, and the S&P 500 has already increased by 2% in recent days as funds start allocating.
Other analysts also predict similar volatility control fund buying.
UBS models are flagging $90-110B in potential one month equity buying using a similar volatility profile.
McElligott from Nomura revealed that, if anything, his model likely underestimates the size of the systematic universe.
Most of the firms using these strategies are hedge-fund investors, which can make it difficult to assess the exact amount of capital they have available to deploy.
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RELENTLESS $100B+ BID FOR STOCKS IS AHEAD (P2)
What can we expect?
Similar predictions from McElligott's Nomura model in the past have preceded strong returns for stocks over the following one to three months.
Let’s take a look at similar instances when the model has predicted large buying from volatility control funds.
Three of those instances occurred in 2019, each time followed by strong short-term price action.
Two of those instances occurred in 2017 during an exceptionally strong period for stocks.
There was one instance that occurred in June 2018, which was followed by a small two week drop in the S&P 500, but then a recovery leading to +5% after three months.
There was one instance in 2012 that saw a +4% gain over two months and one instance in 2014 that saw a +5% gain over three months.
Finally, there was one instance in 2006, followed by a +11% gain over five months.
Wrapping up
Volatility control funds are very likely to be buying substantial amounts of US stocks over the coming weeks.
The only reason why this wouldn’t happen is if we see another crazy period of volatility imminently, which would cause three month realized volatility to remain high.
This means we will very likely see a relentless systematic bid for stocks in the coming weeks.
While this doesn’t guarantee stock prices will rise, it’s a strong indication they will, with huge demand ahead.
Interestingly, this coincides with our bullish macro backdrop we wrote about on Saturday.
July is looking like it could be a promising time for investors.
That’s it for today, see you in the next one!
POLL OF THE WEEK 📊
Last week’s poll revealed that Milk Road Macro readers are very much split over the current market regime.
We asked: “How are you playing the current uncertainty in markets?”
- 25% of respondents think markets are mostly on the up.
- 20% think it’s going to get worse before it gets better.
- 55% are optimistic, but waiting for confirmation.
This week we are asking:
President Trump is demanding the Fed slash interest rates, but what do you think?
- Yes, I agree, the Fed should slash rates quickly
- I think the Fed should cut rates, but slowly
- I think the Fed should continue to hold steady and watch the data closely
- No way, the Fed should not be cutting rates right now
BITE-SIZED COOKIES FOR THE ROAD 🍪
The Senate pulled an all-nighter as leaders searched for votes to pass President Trump’s “Big Beautiful Bill”. The Senate version of the tax and spending bill is likely to add $3.3 trillion to the government’s huge budget deficit.
Tesla is expected to report another tough quarter when it comes to electric vehicle deliveries. Investors are hoping the bigger story remains its promising robotaxi tests.
Treasury Secretary Scott Bessent slammed the Fed for delaying rate cuts, branding Fed members “frozen at the wheel”. Meanwhile, Trump sent Fed Chair Powell a handwritten note demanding rates be lowered.
MILKY MEME 🤣
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